January – a turbulent month for some
For those that like to keep an eye on the market you will undoubtedly have noticed that global financial markets have had a turbulent start to the year.
Having worked with most of you for many years I am confident that you will now have a pretty good idea of how markets work.
Each day (and with mathematical reason to) I wake up optimistic about the markets and that I (and you my clients) can, on aggregate, anticipate a positive return from my (your) invested funds.
History tells us so but this does not mean that short term turbulence is not to be expected…in fact it is, and always will be, part and parcel of the investment experience. And January is a really good example of this but when you dig deeper there are a few things to take comfort from:
January’s damage has been confined to specific market sectors like technology
If you were heavily exposed to technology stocks, you will have had an uncomfortable ride.
The good news is that whilst your BettrInvest Portfolio is invested in some tech companies the vast majority of your portfolio is not.
A good job too as some high-profile tech-heavy funds have suffered falls of up to 25% in January alone! Interestingly some Baillie Gifford funds (the darling of 2020) – which specialises in investing in high-growth technology companies – have been severely hurt by the sell-off in growth stocks over the past month.
The Baillie Gifford US Growth Trust, Scottish Mortgage Investment Trust and Keystone Positive Change Investment Trust were down 25.1%, 21.6% and 19.3% respectively over the month (source: Morningstar).
What happens in January is no guide to the year ahead
There’s an old saying on Wall Street that, “as goes January, so goes the year”. In other words, what happens on the financial markets in the first few weeks of the calendar year tends to set the tone for the rest of the year ahead. If the adage turns out to be true in 2022, we are certainly in for a rollercoaster ride.
But, on closer inspection, the “as goes January” theory turns out to be a myth. Since 1950 there have been 28 years in which January produced a negative return for the S&P 500. The average loss for the month in those 28 years was 3.6%. However, over those 28 years, the average return over the following 11 months was 5.4%. So a bad January for stocks has generally not meant a bad year (source: Robin Powell Evidence Based Investor).
Uncertainties abound, but they always do
The markets hate uncertainty, and there seems to be plenty of uncertainty around at the moment. For example, the Federal Reserve and other central banks are widely expected to raise interest rates, possibly several times, to combat rising inflation.
But there are other concerns too. It remains far too early to draw a line under the Covid crisis. Geo-political tensions over Russia and Ukraine, as well as China and Taiwan, could boil over any time. Here in the UK, meanwhile, a change of Prime Minister is a distinct possibility.
All of those issues have undoubtedly weighed on the markets in recent weeks. But we simply don’t know how any of them will unfold, let alone what the impact on the markets will be.
Remember, it isn’t investments that get tested in turbulent markets; it’s investors. And it’s not what the markets do that matters; it’s how you react. Yes, there’s plenty of uncertainty, but there always is. And although selling out of equities might provide some short-term emotional relief, it’s patience and discipline that markets reward in the long run.
And lastly…why I’ll Always Be Optimistic About the Market
As Dimensional’s founder David Booth says…
“At the end of every year, we look back and forward. What do we think the next year will bring? I don’t know. No one does. Think about it: No one does. After these last two years, this lesson should be obvious to all of us.
“But for the past 50 years, I have held a long-term faith in the power of markets. When they go up or down, I see them simply responding to new information. The market always wants buyers and sellers to make a deal. Transactions only happen if people agree on a price that seems fair to both sides.
“In 2022, new challenges await. New businesses will grow. Old ones will adapt. Some will fail, while others flourish. Rather than having to guess what will happen to whom and when, I choose a different path. I invest in the market. It is a unique human invention.
“…I wake up every morning believing the market will go up a little but prepared for if it drops. And you should too. Markets will go up and down, but you should expect them to be positive, and that is what history has also shown. If you can hold this in your heart, you can be optimistic and resilient, you can manage the central challenge of human existence.
“It’s hard to do. But it’s worth it.”
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